Empresas Copec SA
SGO:COPEC
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Earnings Call Analysis
Q3-2024 Analysis
Empresas Copec SA
In the latest earnings call for Empresas Copec, the company reported a solid EBITDA of $760 million, representing a significant year-on-year increase of 27%. The growth was driven by better performances in its forestry and energy sectors, mainly due to higher volumes and improved pricing, especially in the pulp product segment, which experienced a 135% rise in EBITDA to $339 million year-over-year.
The forestry division, particularly Arauco, saw an EBITDA of $463 million, which was also up from prior quarters, highlighting significant operational efficiencies and better market conditions. Meanwhile, the energy sector delivered improved results, with Copec's EBITDA reaching CLP 211 billion, boosted by higher volumes in gas stations and industrial channels despite facing some unfavorable inventory revaluation effects.
Arauco announced substantial developments, including the Sucuriú project, the largest investment in the company’s history. This is a new pulp mill in Brazil, with a projected construction cost of $4.6 billion, aiming for a capacity of 3.5 million tons. To finance this, Empresas Copec will inject $1.2 billion sourced from current cash reserves and adjusted dividend policies. Additionally, the sale of forestry assets in Brazil provided a significant cash inflow of $967 million, contributing to the reduction of net debt levels.
The paper market faces challenges, particularly in China, where demand remains cautious, and prices for hardwood have trended downward. Forecasts indicate potential recovery in the fourth quarter as economic measures are introduced, but persistent increases in supply may continue to affect pricing. Despite this, Copec expects its production volumes to rise, reflecting good utilization of resources, including plans for ramping pulp production.
Empresas Copec is proactively enhancing its sustainability efforts, highlighted by the issuance of its first green bond valued at approximately $163 million and the launch of a subsidiary, Abastibletec, aimed at innovating sustainable energy solutions. The goal is for these solutions to contribute 20% of Abastible's EBITDA by 2028, showcasing the company’s commitment to balancing growth with environmental responsibility.
The company's strong cash flow and operational results have led to a lower net debt-to-EBITDA ratio of 2.5x, positioning it well within its financial policy’s target range. This improvement reflects effective debt management strategies, including the recent successful forestry asset sale.
The company's strategic adjustments, including a temporary reduction in dividend payouts from 40% to the legal minimum of 30% over the next three years, will aid in financing comprehensive projects while ensuring financial health. The upcoming Investor Day will present an opportunity for stakeholders to gain deeper insights into the company’s trajectory and strategic initiatives.
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Good morning, everyone, and welcome to Empresas Copec Third Quarter '24 Results Conference Call. Today's presentation and the third quarter earnings release are available on the company's Investor Relations website at investor.empresascopec.cl.
Before we begin, I would like to remind you that this presentation may include market outlooks and forward-looking statements, which are based on the beliefs and assumptions of Empresas Copec management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events, and therefore, depends on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Empresas Copec and could cause results to differ materially from those expressed in such forward-looking statements.
This presentation contains certain performance measures that have been adjusted with respect to IFRS definitions, such as EBITDA.
[Operator Instructions]
I will now turn the conference over to Mr. Rodrigo Huidobro, Chief Financial Officer of Empresas Copec. Please go ahead, sir.
Okay. Hello, everyone. Thank you very much. Thanks, everyone, for joining into this webcast where we will be taking a look at the results of the third quarter 2024 for Empresas Copec. I will do the first part of the presentation by myself. And when we come to the Q&A section, I will be joined by Mr. Cristian Palacios, Director of Finance and Investor Relations at Empresas Copec and also by Mr. Gianfranco Truffello, CFO at Arauco. Let me remind you that you can post your questions through the chat that is available on the webcast platform as from now if you wish to do so.
So having said all that, let me begin by the most important highlights for the quarter. We recorded an EBITDA of $760 million, which is in line with the previous quarter and way above last year, and this has to do with improved performances in forestry and energy. In the case of Forestry, we have higher volumes. We also have prices, which are substantially higher than last year and also lower unit selling costs in pulp, together with increased volumes in panels.
Q-on-Q, we had essentially volumes growth in the pulp segment. In the case of the energy sector, we recorded an improved performance at Copec, where we have higher volumes and also favorable industrial margin. Also good results coming from Abastible, where we have higher volumes across the board for all countries.
In the case of the Q-on-Q comparison, we had an unfavorable inventory revaluation effect for Copec. In what relates to the main projects and other developments that we have announced during the quarter, we announced the approval of the Sucuriú project by Arauco. This was communicated as an essential fact at the parent company level and at the Arauco level as well, and we did a special webcast on that quite a lot of detail about the project already. Together with that, Arauco announced the closure -- the closing of the sale of Forestry assets in Brazil. And we also have another project just announced by our LPG company in Colombia, Colgas, which announced the beginning of construction of an import facility in Colombia.
In terms of ESG, we issued the first green bond at the parent company level. Abastible launched a subsidiary, which is going to be devoted for sustainable energy solutions. And Copec continues to make progress in electromobility by announcing a new electro-terminal for buses in Valparaiso.
The main figures for the quarter are shown on screen. As I said before, we recorded EBITDA of $760 million, which is up 27% year-on-year. Our debt-to-EBITDA is considerably down with respect to the last figures that we had published, 2.5x. That's what we have reached at the end of the quarter, 2.5x. EBITDA Pulp is up by 135% year-on-year, which brings it up to $339 million. In the case of Wood Products, it's pretty much in line with the last quarter and standing at $124 million. Copec and Abastible are both up with respect to last year. In the case of Abastible considerably up with a very good performance. And in the case of Mina Justa, we are showing an EBITDA of $175 million, which is up both year-on-year and Q-on-Q.
That's the historical evolution of EBITDA and net income that we are showing on screen. Once again, we came up to $760 million of EBITDA. This is up 27% with respect to last year. $404 million of net income, which is also quite significantly up with respect to both the immediately preceding quarter and the quarter last year and which is influenced by a nonrecurring effect that we had in the nonoperating results.
In terms of our balance sheet, you can see there that our total financial debt is down to $2.2 billion, and we have a very well-balanced schedule of maturities going forward. Net debt-to-EBITDA continues its downward trajectory, closing the quarter at 2.5x, which is at the exact midpoint of the desired range that we have established in our financial policy. One of the drivers of this quite significant drop in the net debt to EBITDA is the fact that EBITDA is gradually has been going up, but also the fact that we got a significant cash inflow from the operational sale of Forestry assets of Arauco in Brazil.
And you can see down there that the debt -- distribution of debt by company is in line with the relative magnitude of each company and also with the relative risks of each company. In terms of returns and EBITDA margins, we are considerably up with respect to last year and pretty much in line with respect to last quarter.
Let us move and deep dive into the Forestry division. What we are seeing here is Arauco recording an EBITDA of $463 million -- $463 million -- this is up with respect to the preceding quarter and also significantly up with respect to last year and has to do essentially with improved margins in pulp, which in turn, stem from higher volumes, lower costs across all fibers and also improved prices with respect to last year.
Net income is also influenced by a nonrecurring effect related to the sale of assets in Brazil, which amounts to approximately $170 million. A few words about the pulp market during this quarter, you can see that EBITDA for pulp is up to $339 million, which is in line with the last quarter, but considerably up with respect to last year. And this has to do with increased volumes, also prices, which increased a lot with respect to and decreased a little bit with respect to the last quarter, but also and to a great extent, has to do with costs that went down.
Remember that last year, we were still facing the initial stages of the MAPA ramp-up with very volatile costs that were also at a very high level. And this year, we are seeing costs that are more stable and at lower levels at MAPA. So that has -- is a significant part of the explanation for the improved EBITDA in pulp.
A few words about the market for the third quarter 2024, we saw a market that was weaker. During the third quarter, we had a decrease in demand together with an increase of supply and therefore, inventories in general trending up. As you can see in the graph down to the bottom right corner. In China, the market was stable and relatively cautious. Paper producers are facing lower margins. So in general, we saw prices trending downward, especially in the case of hardwood. Hardwood had a downward trend during the whole of the quarter and has shown some stability during the last few weeks. In the case of softwood, however, we saw a slight decrease at the beginning of the quarter, but we then saw prices stabilizing at quite healthy levels for softwood.
In Europe, we had seen a very strong market during several quarters. That was not so anymore for the last quarter, for the third quarter 2024. The market was definitely weaker than what we were seeing, and we saw several maintenance stoppages and also hardwood prices trending down. And finally, dissolving pulp showed -- continued to show a healthy situation with a balanced supply and demand.
In terms of the outlook for the fourth quarter, we could see some recovery in China. We have seen some degree of resistance at the levels where the prices are right now. And together with that, we just saw the announcement of several economic measures announced by the Chinese government, which aim to boost the recovery of the Chinese economy. So this might eventually have some effect on the pulp markets.
Europe might continue to show trends like the ones we saw in the third quarter. So we continue to see some cautiousness mainly in printing and writing segments. And on the other hand, we could see supply continuing to increase because we are seeing the ramping up of 2 new facilities that are entering the market. Given all that, we are showing there on the upper right-hand corner, the evolution of prices in China. So you see this very abrupt decrease in prices for hardwood, reaching levels of $550 to $560 per ton where they are standing right now. And as I said before, we have seen some resistance in that range. In the case of softwood, as we said before, we saw also a significant drop at the beginning of the quarter, but then we have seen stability in prices with levels stabilizing at this very healthy, still very healthy levels around $770 per ton.
Moving on to the Wood Products. We recorded an EBITDA of $124 million pretty much in line with the second quarter 2024. These figures are in line with the mid-cycle performance for the Panel division. We have always said that this is a division that should generate somewhere around $500 million to $600 million in a mid-cycle scenario. We have seen prices trending down a bit. But however, we have seen panels volumes and not only panel volumes, but volumes basically across the board for panels, for plywood and to an extent also for sawn timber recovering quite healthily.
So all in all, a steady, stable situation for the Woods and Panels division. If we do the breakdown by geographical area here, North America represents more than half of our total sales. In general, we are seeing stability. In MDF, we have seen some new mills ramping up. So there might be a degree of effect from the new supply. However, in the medium term, we could see a positive trend here. In the case of particle boards, the market has continued to show strength. We have seen price increases and fully operating mills and capacity exiting the market. So all in all, stability and a fairly good perspective. In the case of remanufactured products, also a healthy market with a balanced supply and demand and some opportunities for price increases. And in the case of plywood, also a positive outlook that we could see for the rest of the year.
The second most important geographical area for our Woods and Panel division is South and Central America, where we have seen a different behavior for the different markets. In the case of Brazil, quite a stable market in terms of both volumes and prices. Chile still with some uncertainty related to a potential recovery of construction, which hasn't happened yet. So key sectors such as retail and construction haven't done very well over the last few months. Argentina, we are seeing with a slight pressure on costs, but with a slight recovery in volumes and margins.
In the case of the rest of the world, Asia, Oceania, Europe and the Middle East, that represents a lower percentage of our sales. And probably one thing to note here is some weakness that we are seeing in Asia because of demand weakness and increased supply.
Let us move on to the Energy division now. Copec recorded an EBITDA of CLP 211 billion, CLP 211 million compared with CLP 190 million for the third quarter '23. So significantly up with respect to last year, but slightly down with respect to the third quarter -- to the second quarter of 2024. The increase with respect to last year comes from an improved industrial margin, together with a healthy performance of volumes, both in the gas station and the industrial channel in Chile. All of that offset to some extent by an unfavorable inventory revaluation effect and by lower volumes at Terpel.
You can see the evolution of our volumes there with a healthy growth of 3.8% in the case of gas stations and 2.4% in the case of the industrial channel in Chile. Terpel recorded an EBITDA of COP 153 billion -- sorry, COP 448 billion for a net income of COP 153 billion. And the EBITDA is slightly down on the net income as well with respect to the third quarter '23. This decreased operating income has to do with lower volumes in some of the geographies and overall, a lower total volume for Terpel which has been hit to a great extent by some countries where we have specific factors affecting the volumes such as Panama, which is a large country for Terpel and where we had the closure of one significant mining client. In the case of Dominican Republic and Peru, however, we see an interesting development of the industrial and airport markets there. Together with that, we had an unfavorable inventory revaluation effect. We had some increase also in distribution costs. All of that offset to some extent by the sustained strong performance that we have seen in the lubricants division at Terpel.
Abastible recorded quite a strong quarter with an EBITDA of CLP 60 billion, CLP 60 billion compared to CLP 48 billion in the third quarter '23. So quite a significant improvement there that has to do with a very attractive volume growth across all geographies. As a matter of fact, we can see volumes growing in Chile, Peru, Colombia and Ecuador at rates which range from 5% to 8%.
So quite healthy growth of volumes in general in Abastible together with margins that also increased to some extent. You can see the behavior of all geographies there, as I said before, with improved volumes across the board, in general, having to do with successful commercial strategies, many of which have a very important component, commercial strategies offering integral energy solutions to traditional customers. And together with that, some specific factors that have affected the volumes during this last quarter, such as the behavior of the poultry sector in Peru, which is quite a significant customer for Solgas there and also some opportunities for other -- for the substitution of other type of fuels in the different countries. So all in all, a very good performance of Abastible in this quarter.
And then moving on to the other investments. Just a couple of things to highlight here. Sonacol as usual, very stable. Igemar recording a loss in this particular quarter having to do with some weaker conditions essentially in the forest, in the fishing sector. Metrogas with a strong results compared to a quarter last year where we recorded a very significant effect of foreign exchange differences on the provision that we had -- the judicial provision that Metrogas had recorded in dollars. And finally, Cumbres Andinas recording an EBITDA that is higher than last quarter, an EBITDA of $175 million compared to $166 million last quarter, which has to do with increased prices, so better prices and also the reception of some insurance compensations at Mina Justa during this quarter, having to do with business interruption during some months last year.
So a better performance of -- better EBITDA of Mina Justa in spite of the fact that we -- as we have said before, we are producing at a segment of the mine that has a lower grade, and therefore, production is lower and cash costs are higher than last year. In spite of that, we have recorded a better EBITDA than last year. And that is basically what we had prepared in terms of numbers and review of results.
And in terms of the highlights of the quarter, -- as we have discussed in detail during the quarter, we have -- Arauco has approved the construction of the Sucuriú project, the largest investment in the history of the company. We held a specific conference call on this. So you have a lot of information about this project. But just to remind you, this is a new pulp mill that we will be constructing through Arauco in the state of Mato Grosso do Sul in Brazil. It is a 3.5 million ton pulp mill, which implies a total construction CapEx of $4.6 billion. This has been contracted out to Valmet, a Scandinavian vendor, which has experience in the pulp industry and in a contract of the format of the EPC format.
So Valmet is going ahead with an EPC for the construction of the mill in Brazil. This is a state that has excellent conditions for the growth of plantations. We have been acquiring lands and farming, and acquiring plantations for the last more than 10 years in Brazil, excellent conditions for the growth of trees and also excellent conditions in terms of logistical connectivity for reaching the coast of Brazil and from there, the final destination markets.
The financing of the project considers an equity injection of $1.2 billion from the parent company, Empresas Copec into Arauco, so an equity injection at the Arauco level coming from the parent company Empresas Copec, which will be financed via the existing cash, which nowadays amounts to more than $600 million at the parent company level, together with dividends to be received from the other non-Arauco subsidiaries. So basically, Copec, Abastible, and Mina Justa will be providing dividends to the parent company, which are going to then be injected into Arauco. And together with that, a temporary reduction of the dividend to be paid by Empresas Copec to its shareholders with a reduction of the policy called dividend policy during 3 years from our traditional 40% to the legal minimum in Chile, which is 30%. That should provide for the financing of the Sucuriú project and for the injection of up to $1.2 billion that we have committed from the parent company into Arauco.
Another important operation that was closed during the quarter was the sale of forestry in Brazil that Arauco had announced by the end of last year. It hadn't materialized yet, and it was finally closed during the third quarter of 2024. This is a sale of forest in Brazil, which brought about a cash inflow -- a net cash inflow of $967 million, which was essentially devoted to paying down debt at the Arauco level and that is part of the explanation for the drop in net debt to EBITDA that we have seen during this quarter at both the Arauco level and the consolidated level. And together with that, this is an operation that has -- as we mentioned during the presentation, has given way to a nonrecurrent effect of $170 million in the net income for this quarter.
On another scale, but also very important, Blue Express is a company that we acquired a couple of years ago through Copec -- through our subsidiary company, Copec. It is a very good complement for the existing assets of Copec. It's a last mile logistics company, which complements very well with the logistics related to the gas station network for Copec. Blue Express has grown at 2-digit rates -- 2-digit rates since Copec took hold of the company, so much so that we are now giving way to the expansion of its distribution center through this investment of $35 million. So Blue Express is doing very well and with very good projections and therefore, this expansion has been announced.
Also on another scale, but also quite significant, Colgas, which is our liquid gas division in Colombia, a subsidiary of Abastible, has announced the construction of its new liquefied gas import infrastructure in Colombia with an investment of up to $60 million in different stages, which will allow Colgas to have better access to the importing markets for liquid gas and therefore, have a more efficient and more robust supply of liquid gas.
In terms of ESG, also several important news here. Empresas Copec has carried out the first green bond issuance at the parent company level for a total amount of USD 4 million, which is the inflation adjusted currency in Chile. This is the equivalent of USD 163 million. So a green bond placed by Empresas Copec parent company into the Chilean local market with very good conditions, as a matter of fact, with the lowest corporate spread that the market has seen during this year. Abastible launched a subsidiary called Abastibletec, which will be devoted for sustainable energy solutions. This is a format -- a commercial format of energy solution that Abastible has been pushing during the last few years, and that will be formalized and also boosted with this new subsidiary company that aims to operate not only in Chile, but also in the other geographies where Abastible has operation and also aims to represent 20% of Abastible's EBITDA by 2028. So energy solutions related to innovation and renewables should represent 20% of Abastible's EBITDA by 2028.
And finally, Copec continues to make progress in its positioning in electromobility. It has announced a new terminal for buses. Copec has turned itself into the most important player for the supply of electricity for buses, city buses in Chile and in the countries where it operates and continues to do so by this new announcement of this electro-terminal carried out by Voltex, which will supply and accommodate up to 44 buses in the city of Valparaíso, near Santiago in Chile.
And last but not least, this is probably the final call for our Investor Day, which is a few days away. This is going to take place next week on 2 sessions in November 19 and November 20, we're going to have C Level presentations in Santiago taking place next Tuesday during the morning of next Tuesday, so very interesting presentations, which will be carried forward by the most important executives of our company and our subsidiary companies. And that will be followed on Wednesday by a trip to the south of Chile, where we will be visiting Arauco's Line 3, MAPA -- the MAPA project, which is, of course, already up and running and also our biotechnology center at Bioforest. So a very interesting visit to the south of Chile. All investors more than welcome and still have time to join into this Investor Day, and we will be waiting for you.
Having said all that, we will open it up for the Q&A section. As I said at the beginning of the presentation, I will be joined by Cristian Palacios and Gianfranco Truffello. So please feel free to finish posting your questions through the chat at the platform. Cristian and Gianfranco, please come in. Thank you.
[Operator Instructions]
Hello, everyone. Thank you for attending this webcast. I'm going to start with a couple of questions in Forestry. The first comes from Henrique Marques at Goldman Sachs. Gianfranco, could you give a little bit of color on the potential impacts in the cost side for wood panels after the forestry sale, especially as wood price are continuously increasing in Brazil?
Okay. When we decided to sell the forestry, but now we assumed that we were going to incur higher cost of wood for the part that was vertically integrated with our forestry. In our panel mills in Brazil, we have 4 mills. At that time, we had about 70% of the wood coming from third parties. So only 30% was vertically integrated. So we assume a higher cost. Up to now, we haven't seen any differentials in cost from our own wood. So we have been able to supply with third parties without any problems. And we have to be seeing on the years coming if that not significant increase in cost continues. But we were prepared and we assume that in the evaluation. So we are prepared to deal with that and the mills are having good margins and good EBITDA are competitive with the current structure of supply of wood.
Another one from Henrique. Do you have any update view on pulp prices for 4Q? How are negotiations in the long-term pulp we got in?
Well, I don't have information about the pulp negotiation. Of course, it's happening right now at this moment. What I can mention is that you know that short fiber prices in eucalyptus went down significantly from the numbers we saw in July, August. And now it's standing at about $550, $540. We think that, that should be like the bottom of the cycle because if you take into account the marginal cost of producers that have increased at least $100 since the last cycle. At that time, the price went down to $450 something like that. So we think that, that should be more or less the equilibrium for the bottom of the cycle. We have seen that the paper producers should have better margins, better producers in -- especially in China with this current price, and they should start increasing demand and increasing a little bit the inventories.
So we think the demand will be there. We have to watch what happens with the supply. There was some information about some competitors curtailing a little bit the production just to balance a little bit the supply and demand. So we need to follow a little bit how the new supply comes to the market. But I think that we are already in the bottom of the prices for short fiber. Long fiber is currently at good prices, $770 more or less and has a big differential, about $220 per ton. And there's no new supply. There's only reductions of supply in nonfiber. So that differential should continue for some time. So -- we need to watch out supply, I would say, for the coming month in short fiber, but I would expect the buyers returning to the market in terms of volume as the prices should go further down.
Okay. So we have Matheus Moreira, Bradesco. [indiscernible] in pulp, how do you see pulp volumes evolving in the coming quarters? And do you have the sense that most of the buyers have returned to the market following the steep price correction?
Yes. It's too early to tell, but I think that we should see more buyers willing to increase their volumes because to -- the low inventories they have over there. In our case, volumes should be increasing. I mean we have had very good production in Line 3 in the last month. So I think we should increase volume of production, and we can also reduce a little bit the inventories that we have. So I think the volumes should be catching up in short fibers. It's very important the negotiations that are happening in London public. So we expect to have more information next week. But I would say that our expectation at this is that volumes should improve.
Thank you, Gianfranco. Juraj Domic is asking about if you can provide an update on the forestry assets progress for...
Okay. As we have mentioned before, for a 3.5 million ton mill, we need approximately 400,000 hectares of plantations on a continuous basis for harvesting and replanting. We had from the past 40,000 hectares that are land is owned by us that we bought many years ago. And we have been planting and leasing and doing some joint ventures in the recent years. So we have been able to secure around 220,000, 230,000 hectares of land currently.
In terms of planting, we have also been planting that, and we have a little bit more than 100,000 hectares. And the rhythm will be more or less between 50,000 to 60,000 hectares a year of planting. And most probably, we will have to buy a little bit from third parties at the beginning of the ramp-up of the mill because for a 3-month -- but we are in a good track. Our [indiscernible] has been very good and with a good rhythm, and we expect to have sufficiently secure supply to the mill once we start producing at the end of 2027.
Very clear. And I have 2 more questions from [indiscernible], but they were already answered. It was about market pulp dynamics. So I'm going to wait another 10 seconds to see we have another question -- and there are no more questions for today.
Okay. This does concludes the question-and-answer section. At this time, I would like to turn the floor back to Mr. Rodrigo Huidobro for any closing remarks. Please go ahead, sir.
Thank you very much. So our final invitation for the event taking place next week. All investors are more than welcome to our Investor Day taking place on Tuesday and also an invitation to join us once again by the end of February or beginning of March to take a look at the results for the fourth quarter 2024. Thank you very much for joining us today, and have a good afternoon. Bye-bye.
Thank you. This does conclude today's presentation. You may disconnect now, and have a nice day.